Who was William O’Neil, and where did he publish CAN SLIM?
William J. O’Neil (1933–2023) started as a stockbroker in 1958 and founded his own investment research firm in 1963. In 1984 he launched a financial newspaper, Investor’s Daily, renamed Investor’s Business Daily in 1991, which became the main outlet for his ideas. He died in May 2023 at 90.
He published the method in How to Make Money in Stocks: A Winning System in Good Times or Bad (McGraw-Hill, 1988), revised in several later editions. It came from studying the biggest stock winners and listing what they had in common before their large moves. The card at the top of this page sums up the seven letters.
Two things before the details. O’Neil insisted the rules work as a set: when investors who had ignored the loss rule blamed the method, he answered that it must be used whole. And his results are not typical; nothing here implies that he endorsed this site or any tool.
C and A: current quarterly and annual earnings growth
C asks for strong growth in the latest quarter’s earnings per share (EPS), compared with the same quarter a year earlier so that seasons do not distort it. O’Neil gave about 18–20% as a floor, and 25% or more is the figure most often quoted. Growth that speeds up from quarter to quarter, and sales up about 25%, count in the stock’s favor.
A asks for a record behind the quarter: EPS up in each of the last three years, at an annual rate of 25% or more, with a return on equity (ROE) of 17% or higher.
Hypothetical: Company A earned $0.40 a share in last year’s third quarter and $0.60 in this year’s: ($0.60 − $0.40) ÷ $0.40 = +50%. Its last four quarters grew +10%, +20%, +35% and +50% (left panel below). Company B shows the same numbers in reverse (right panel): still growing, but slower every quarter. O’Neil treated two quarters of clear slowdown as a warning, so B fails C in spirit.
- EPS (earnings per share)
- Net income divided by the number of shares outstanding.
- ROE (return on equity)
- Net income divided by shareholders’ equity: the profit a company earns on the capital its owners have put in.
N, S and I: something new, demand and institutional buying
N stands for something new: a product, a service, new management or an industry change, plus a share price emerging from a sound base to new highs. O’Neil’s point was that big winners usually look expensive when they break out, while stocks near their lows are often there for a reason.
S is supply and demand. The shares available are the supply, and volume shows the demand: on the breakout day volume should jump, at least 40% above the stock’s average daily volume in the common teaching. Buybacks that shrink the share count help; heavy volume on down days is a warning. See relative volume.
I is institutional sponsorship: mutual funds, pension funds and other large investors, whose buying can move a price for weeks. O’Neil wanted a rising number of institutional owners in recent quarters, but not a stock so over-owned that few buyers are left.
L: leader or laggard, and the relative strength line
L means buying the leader, not the cheaper laggard in its group. O’Neil used a relative strength rank comparing a stock’s 12-month price performance with the rest of the market. He wanted 80 or better (the stock beat roughly 80% of others), avoided anything below 70, and preferred the top two or three stocks in a strong industry group.
The relative strength (RS) line shows the same idea: the stock’s price divided by the S&P 500, rising when the stock beats the index and falling when it lags. It is not the RSI indicator, which measures one stock’s momentum on its own.
In the drawing below, the RS line reached a new high before the price did, a sign many followers of the method look for: leadership while the stock is still in its base. Hypothetical: Company A rose 60% in a year while the S&P 500 rose 10%, so its RS line climbed. A breakout with the RS line far below its old high is a weaker candidate.
M: why market direction comes first
O’Neil wrote that if you misjudge the general market, about three out of four of your stocks will fall with the averages, however good they looked. So M is the switch for everything else: open new positions only when the major indexes are in a confirmed uptrend, and get defensive when they turn down.
He watched two signals. A follow-through day is a strong gain in a major index on higher volume than the day before, usually from the fourth day of a rally attempt: a new uptrend may be starting. A distribution day is a decline in a major index on higher volume than the day before, a sign of institutional selling; he wrote that three to five within a week or two can end even a strong bull market.
Failure case, hypothetical: Company A passes the other six letters and breaks out, but the major indexes have logged four distribution days in two weeks, and the breakout fails within days. In O’Neil’s framework that was not bad luck: M was red, and the right move was to wait. To read trend on any chart, see market structure.
The buy point: a sound base, the pivot and volume
O’Neil bought breakouts from bases, sideways consolidations in which a stock digests an earlier advance. His best-known base is the cup with handle, drawn below: after a prior uptrend, a rounded U-shaped cup that lasts at least about seven weeks, then a short handle that drifts slightly lower in the upper half of the base, usually on quieter volume. The pivot, or buy point, is the top of the handle.
The buy comes when price clears the pivot on strong volume. He advised buying as close to the pivot as possible and not more than about 5% above it; beyond that, you are chasing. A V-shaped bounce with no base, or a handle sagging into the lower half of the cup, is not a sound base. More shapes in chart patterns and the volatility contraction pattern.
Hypothetical: Company A peaks at $62.00, falls to $48.00 and climbs back to $61.00 over nine weeks. The handle drifts down to $57.50, above the base’s midpoint of $55.00, and its top at $61.00 is the pivot. A daily candle then closes at $61.60 on 1.9 million shares against a 1.2 million average, about 58% above normal. The buy zone runs to about $64.05, 5% above the pivot.
The 7–8% rule: cutting losses the CAN SLIM way
O’Neil’s best-known rule: sell any stock that falls 7% to 8% below your purchase price, with no exceptions and no waiting for a bounce. It is a maximum, not a target. If the chart offers a logical stop closer than that, such as just under the handle low, use it.
The reason is the math of losses, shown below: a 10% loss needs an 11% gain to get back to even, 25% needs 33%, and 50% needs 100%. Capped near 7–8%, any mistake can be recovered with one decent winner. On the profit side, he suggested taking many gains at around 20% to 25%, roughly three times a typical loss.
In the example, a buy at $61.60 with a stop just under the handle low, at $57.40, risks $4.20 a share, or 6.8%: closer than the 7–8% level of $57.29 to $56.67. A 20% gain would be $73.92. If the stock falls to $57.40 instead, the stop sells it, whatever the earnings. See stop loss and take profit.
How to apply CAN SLIM with a stop and a position size
The 7–8% rule caps the loss per share; position size caps the loss on the account. Hypothetical: with a $25,000 account and a 1% risk limit, you can lose $250. $250 ÷ $4.20 = 59 shares, about $3,630 of stock. If the stop is hit, you lose about $250 plus costs. The position size calculator does the math.
If you time entries intraday, UpTickFlow, our invite-only TradingView indicator, can be a second check on a stock already on your watchlist. It does not screen earnings or find bases. On 5-minute to 1-hour charts it waits for a candle to close at a level, draws an entry, a stop and a target before the trade, scores the setup from 0 to 100 and stays quiet in chop.
- Check M: are the major indexes in a confirmed uptrend? If not, build a watchlist and wait.
- Screen for C and A: strong recent EPS and sales growth, three years of rising EPS, ROE of 17% or more.
- Keep the leaders: relative strength rank of 80 or better, a strong group, rising institutional ownership.
- Find a sound base, mark the pivot and set an alert there before the breakout.
- Buy on a close above the pivot on volume at least 40% above average, no more than about 5% above it.
- Set the stop at the logical level, never more than 7–8% below your price, and size from it.
- Plan the exit first: take some or all of a gain around 20–25%, and sell at the stop without debate.
When CAN SLIM fails: failed breakouts, bear markets and crowded leaders
CAN SLIM fails often, and a failure starts out looking exactly like the setup. Same hypothetical trade: Company A closes at $61.60, then sinks back into the handle and hits the stop at $57.40 eight days later. You lose about $248, planned and survivable. Several losses in a row are normal for any breakout method.
A famous method is not a promise: the rules are guidelines drawn from past winners, and markets change. The usual ways it goes wrong:
- Failed breakouts: price clears the pivot, then falls back into the base. The stop is the only defense; see breakout trading.
- Bear and choppy markets: when M turns down, even perfect-looking stocks break, and breakouts fail one after another.
- Crowded leaders: a stock nearly every fund already owns has few buyers left, which is why O’Neil warned against over-owned stocks.
- Earnings gaps: a stock can open far below your stop after a report, so the real loss can exceed 7–8%. Size with that possibility in mind, and see risk management.
- Selective use: keeping the buying rules but dropping the stop or the M filter leaves the risk open-ended.